Assume that a firm has prepared the following cost estimates for the manufacture
ID: 2594158 • Letter: A
Question
Assume that a firm has prepared the following cost estimates for the manufacture of a sub assembly component based on an annual production of 8,000 units.
Per Unit
Total
Direct materials
$5
$40,000
Direct labor
$4
$32,000
Variable factory overhead applied
$4
$32,000
Fixed factory over head applied (150% of direct labor cost)
$6
$48,000
Total Cost
$19
$152,000
The supplier has offered to provide the subassembly at a price of $16 each. Two-thirds of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company buy or make the product?
Per Unit
Total
Direct materials
$5
$40,000
Direct labor
$4
$32,000
Variable factory overhead applied
$4
$32,000
Fixed factory over head applied (150% of direct labor cost)
$6
$48,000
Total Cost
$19
$152,000
Explanation / Answer
Differential Analysis :
Company should make the product.
Make Buy Direct material 40000 Direct labour 32000 Variable factory overhead 32000 Fixed factory overhead (48000/3) 16000 Purchase (8000*16) 128000 Total relevant cost 120000 1280000Related Questions
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